BlackRock agreed to pay a $12 million penalty, according to the SEC. The firm also must engage an independent compliance consultant to conduct an internal review related to the SEC’s allegations.
According to the SEC’s order instituting a settled administrative proceeding, Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company. The SEC’s explanation continues: “Rice was the general partner of Rice Energy and personally invested approximately $50 million in the company. Rice Energy later formed a joint venture with a publicly-traded coal company that eventually became the largest holding (almost 10%) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund.”
The SEC’s order argues BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.
Further, the SEC’s order finds that BlackRock and its then-chief compliance officer Bartholomew A. Battista caused the funds’ failure to report a “material compliance matter,” in the form of Rice’s violations of BlackRock’s private investment policy, to their boards of directors.
“BlackRock additionally failed to adopt and implement policies and procedures for outside activities of employees, and Battista caused this failure,” the SEC suggests. Battista agreed to pay a $60,000 penalty to settle the charges against him.
This is the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board, notes Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit. “BlackRock and Battista caused the funds’ failure to report Rice’s violations of BlackRock’s private investment policy and denied the funds’ boards critical compliance information alerting them to Rice’s outside business interests,” she says.
BlackRock consented to the entry of the SEC’s order finding that the firm willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7, but BlackRock and Battista neither admitted nor denied the findings, the SEC says. The order finds that the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940. Battista also consented to the entry of the order finding that he caused violations of Section 206(4) of the Advisers Act, Rule 206(4)-7, and Rule 38a-1. BlackRock and Battista are required to cease and desist from committing or causing any further violations.